Lawmakers express support for Internet sales tax

Several members of the U.S. House of Representatives Judiciary Committee voiced support Wednesday for legislation that would allow states to collect sales tax on Internet purchases.

Several lawmakers, joined at a hearing by representatives of Amazon.com and a Michigan musical instrument seller, called for Congress to pass one of three bills that would allow states to collect sales taxes from Internet-based sellers with no operations within their borders. Since a 1992 ruling by the U.S. Supreme Court, states are now allowed to collect sales taxes from sellers with no physical presence within their borders.

Internet sellers that don't have to collect sales tax have a 6 percent to 10 percent price advantage over retailers that do, witnesses told the committee. "Over the last 19 years, technology has advanced in the marketplace to the point that physical presence can largely be controlled and isolated to a few states, while selling to many states," said John Otto, a Republican state representative from Texas. "If action is not taken ... then are we not picking winners and losers within the retail sector?"

Although past attempts to allow Internet sales tax collections have failed, the debate may have shifted. Much of the debate at Wednesday's hearing centered around the size of a small-business exemption for an Internet sales tax, not whether Congress should allow the tax.

"The question really is, how do we do it as fairly as we can?" said John Conyers Jr., a Michigan Democrat and sponsor of a bill to allow states to collect the tax.

In 45 states, customers who buy products on the Internet are supposed to keep track of their purchases and pay taxes to their state government, but a small percentage do. Conyers questioned whether states were currently taking enough action to collect the taxes owed them.

As the Internet has matured "there is an argument for letting states decide" whether to collect sales taxes, said Representative Mike Pence, an Indiana Republican. If Congress approves Internet sales tax collection, it should allow no new taxes and it should not create undue burdens on businesses, he said.

Internet sales taxes would create a heavy burden for small businesses selling products online, argued Patrick Byrne, chairman and CEO of Overstock.com. An inexpensive, off-the-shelf software package that small businesses could use to collect sales taxes doesn't exist, he said.

Overstock.com recently spent US$300,000, plus "months" of IT employee time to roll out a software package in anticipation of opening facilities in Kentucky, Byrne said. Inexpensive software that backers of an Internet sales tax say exists is "vaporware," he said.

A requirement to collect sales tax would hurt small businesses while giving an advantage to "big box" retailers, Byrne said.

EBay Vice President Tod Cohen questioned the need for Internet sales taxes, but urged lawmakers to carve out an exemption for small sellers if they approve a tax. Congress should protect small businesses and eBay sellers from "any new onerous tax burdens," he said.

But Paul Misener, vice president for worldwide public policy at Amazon.com, suggested that Congress should set the sales limit for small businesses at a high number, to avoid exempting most Internet sellers. One of the bills pending in Congress would exempt sellers with less than $1 million in sales per year, and a second bill would exempt sellers with less than $500,000 in sales.

Conyers' Main Street Fairness Act allows the Streamlined Sales Tax Governing Board, a group pushing for an Internet sales tax, to set the limit for a small business exemption.

Only 1 percent of online sellers, representing 30 percent of all Internet sales, have more than $150,000 in sales a year, Misener said. "The consequences of the threshold level to states' rights, the states' needs, and fairness are very significant, because a surprisingly large fraction of e-commerce is conducted by smaller volume sellers," he added.

Congress should allow no exemption for small businesses, said Dan Marshall, owner of Marshall Music in Lansing, Michigan. "I'm not exempt -- I collect sales tax on the very first dollar of my sales," he said. "Frankly, any level of exemption is still picking winners and losers."

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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